Saturday, October 28, 2006

Good Vs Bad Trading and Investing Ideals

Sorry about not posting for the last few days but I have been setting up a new computer and have also been busy.

This is just a quick post today on an article on what makes a good trader or a bad trader. I think if you change the word trader to investor you will see how it applies to our longer term fundamental analysis techniques.

Aiming for the Right Target in Trading By Walter T. Downs

When trading goes right, it can be a great feeling. When trading goes wrong it can be a nightmare. Fortunes are made in a matter of weeks and lost in a matter of minutes. This pattern repeats itself as each new generation of traders hit the market. They hurl themselves out of the night like insane insects against some sort of karmic bug-light; all thought and all existence extinguished in one final cosmic "zzzzzzt". Obviously, for a trader to be successful he must acknowledge this pattern and then break it. This can be accomplished by asking the right questions and finding the correct answers by rational observation and logical conclusion. This article will attempt to address one question: "What is the difference between a winning trader and a losing trader?" What follows are eleven observations and conclusions that I use in my own trading to help keep me on the right track. You can put these ideas into table form, and use them as a template to determine the probability of a trader being successful.

OBSERVATION # 1 The greatest number of losing traders is found in the short-term and intraday ranks. This has less to do with the time frame and more to do with the fact that many of these traders lack proper preparation and a well thought-out game plan. By trading in the time frame most unforgiving of even minute error and most vulnerable to floor manipulation and general costs of trading, losses due to lack of knowledge and lack of preparedness are exponential. These traders are often undercapitalized as well. Winning traders often trade in mid-term to long-term time frames. Often they carry greater initial levels of equity as well.

CONCLUSION: Trading in mid-term and long-term time frames offers greater probability of success from a statistical point of view. The same can be said for level of capitalization. The greater the initial equity, the greater the probability of survival.

OBSERVATION # 2 Losing traders often use complex systems or methodologies or rely entirely on outside recommendations from gurus or black boxes. Winning traders often use very simple techniques. Invariably they use either a highly modified version of an existing technique or else they have invented their own.

CONCLUSION: This seems to fit in with the mistaken belief that "complex" is synonymous with "better". Such is not necessarily the case. Logically one could argue that simplistic market approaches tend to be more practical and less prone to false interpretation. In truth, even the terms "simple" or "complex" have no relevance. All that really matters is what makes money and what doesn't. From the observations, we might also conclude that maintaining a major stake in the trading process via our own thoughts and analyses is important to being successful as a trader. This may also explain why a trader who possesses no other qualities than patience and persistence often outperforms those with advanced education, superior intellect or even true genius.

OBSERVATION # 3 Losing traders often rely heavily on computer-generated systems and indicators. They do not take the time to study the mathematical construction of such tools nor do they consider variable usage other than the most popular interpretation. Winning traders often take advantage of the use of computers because of their speed in analyzing large amounts of data and many markets. However, they also tend to be accomplished chartists who are quite happy to sit down with a paper chart, a pencil, protractor and calculator. Very often you will find that they have taken the time to learn the actual mathematical construction of averages and oscillators and can construct them manually if need be. They have taken thetime to understand the mechanics of market machinery right down to the last nut and bolt.

CONCLUSION: If you want to be successful at anything, you need to have a strong understanding of the tools involved. Using a hammer to drive a nut in to a threaded hole might work, but it isn't pretty or practical.

OBSERVATION # 4 Losing traders spend a great deal of time forecasting where the market will be tomorrow. Winning traders spend most of their time thinking about how traders will react to what the market is doing now, and they plan their strategy

CONCLUSION: Success of a trade is much more likely to occur if a trader can predict what type of crowd reaction a particular market event will incur. Being able to respond to irrational buying or selling with a rational and well thought out plan of attack will always increase your probability of success. It can also be concluded that being a successful trader is easier than being a successful analyst since analysts must in effect forecast ultimate outcome and project ultimate profit. If one were to ask a successful trader where he thought a particular market was going to be tomorrow, the most likely response would be a shrug of the shoulders and a simple comment that he would follow the market wherever it wanted to go. By the time we have reached the end of our observations and conclusions, what may have seemed like a rather inane response may be reconsidered as a very prescient view of the market.

OBSERVATION # 5 Losing traders focus on winning trades and high percentages of winners. Winning traders focus on losing trades, solid returns and good risk to reward ratios.

CONCLUSION: The observation implies that it is much more important to focus on overall risk versus overall profit, rather than "wins" or "losses". The successful trader focuses on possible money gained versus possible money lost, and cares little about the mental highs and lows associated with being "right" or "wrong".

OBSERVATION # 6 Losing traders often fail to acknowledge and control their emotive processes during a trade. Winning traders acknowledge their emotions and then examine the market. If the state of the market has not changed, the emotion is ignored. If the state of the market has changed, the emotion has relevance and the trade is exited.

CONCLUSION: If a trader enters or exits a trade based purely on emotion then his market approach is neither practical nor rational. Strangely, much damage can also be done if the trader ignores his emotions. In extreme cases this can cause physical illness due to psychological stress. In addition, valuable subconscious trading skills that the trader possesses but has no conscious awareness of may be lost. It is best to acknowledge each emotion as it is experienced and to view the market at these points to see if the original reasons we took the trade are still present. Further proof that this conclusion may have validity can be seen in even highly systematic traders exiting a trade for no apparent reason, and pegging a profitable move almost to the tick. Commonly, this is referred to as being "lucky" or being "in the zone".

OBSERVATION # 7 Losing traders care a great deal about being right. They love the adrenaline and endorphin rushes that trading can produce. They must be in touch with the markets almost twenty-four hours a day. A friend of mine once joked that a new trader won't enter a room unless there is a quote machine in it. Winning traders recognize the emotions but do not let it become a governing factor in the trading process. They may go days without looking at a quote screen. To them, trading is a business. They don't care about being right. They focus on what makes money and what doesn't. They enjoy the intellectual challenge of finding the best odds in the game. If those odds aren't present they don't play.

CONCLUSION: It is important to stay in synch with the markets, but it is also important to have a life outside of trading. It is a rare individual who can do anything to excess without suffering some form of psychological or physical degradation. Successful traders keep active enough to stay sharp but also realize that it is a business not an addiction.

OBSERVATION # 8 When a losing trader has a bad trade he goes out and buys a new book or system, and then he starts over again from scratch. When winning traders have a bad trade they spend time figuring out what happened and then they adjust their current methodology to account for this possibility next time. They do not switch to new systems or methodologies lightly, and only do so when the market has made it very clear that the old approach is no longer valid. In fact, the best traders often use methodologies that are endemic to basic market structure and will therefore always be a part of the markets they trade. Thus the possibility of the market changing form to the extent that the approach becomes useless, is very small.

CONCLUSION: The most successful traders have a methodology or system that they use in a very consistent manner. Often, this revolves around one or two techniques and market approaches that have proven profitable for them in the past. Even a bad plan that is used consistently will fair better than jumping from system to system. This observation implies that stylistic foundations of a trader's market approach must be in place before consistent profitability can occur.

OBSERVATION # 9 Losing traders focus on "big-name" traders who made a killing, and they try to emulate the trader's technique. Winning traders monitor new techniques that come on the trading scene, but remain unaffected unless some part of that technique is valuable to them within the framework of their current market approach. They often spend much more time looking at how the market seeks and destroys other traders or how traders destroy themselves. They then trade with the market or against other traders as these situations arise.

CONCLUSION: Once again, we can note that the individuality of a trader and his comfort level and knowledge regarding his system are far more important than the latest doodad or Market guru.

OBSERVATION #10 Losing traders often fail to include many factors in the overall trading process that affects the probabilities of overall profit. Winning traders understand that winning in the markets means "cash flow". More cash must come in
than goes out, and anything that effects this should be considered. Thus a winning trader is just as thrilled with a new way to reduce his data-feed costs or commissions as he is with a new trading system.

CONCLUSION: ANYTHING that affects bottom line profitability should be considered as a viable area of study to improve performance.

OBSERVATION #11 Losing traders often take themselves quite seriously and seldom find humor in market analysis or the trading environment. Successful traders are often the funniest and most imaginative people you will ever meet. They take joy in trading and are the first to laugh or relate a funny story. They take trading seriously, but they are always the first to laugh at themselves.

CONCLUSION: Its no wonder that one of the first things psychiatrists test for when treating a patient is whether or not the patient has any sense of humor about his affliction. The more serious the tone of the individual, the more likely that insanity has set in.


Both winning and losing traders consider trading a game. However, winning traders take the game not as a diversion but as a vocation which they practice with an intensity and dedication that rivals the work ethic of a professional athlete. Since the athletic metaphor seems appropriate, I will sum up on that note. If trading were a game like basketball perhaps novice traders would realize more readily that what appears as effortless ease of the professional trader in sinking three-point shots is in
fact the product of endless hours spent shooting hoops in deserted back yards and empty playgrounds. As in sports, the governing factors are internal and external. We deal with the market and ourselves. Both are like weapons and they can be used proactively or destructively. Each and every trade should be taken with professional care and planning In order to bring these observations home in an even more compelling form, lets add an element of ultimate risk to life and limb and say that our "sport" is more like target practice with a handgun. While it is certainly important to hit the target, it is more important to make sure the gun isn't pointed directly at ourselves when we pull the trigger. Minute differences in how we take aim in the markets can have amazing impact on the final outcome. The difference is clear: One method is accurate target practice.

The other is Russian Roulette. Copyright@1999 Walter T. Downs All Rights
Reserved. Distribution is allowed with due credit to the author.

Wednesday, October 25, 2006

Inflation and CPI

CPI rose 0.9% in the September quarter 2006 compared with 1.6% in the June quarter.

CPI rose 3.9% through the year to September quarter 2006.

Contributing most to the increase this quarter were

  • fruit (+20.5%),
  • property rates and charges (+5.6%),
  • water and sewerage (+4.7%),
  • other household supplies (+2.9%),
  • insurance services (+2.2%),
  • electricity (+2.1%),
  • tobacco (+1.4%),
  • domestic holiday travel and accommodation (+1.2%).
  • rents (+1.0%), and
  • motor vehicles (+0.8%)

The most significant offsetting price falls were

  • vegetables (-5.3%),
  • pharmaceuticals (-5.0%),
  • automotive fuel (-1.1%) and
  • tertiary education (-2.2%).

These figures almost guarantee that there will be another interest rate rise. The problem is that the fruit has gone up due to the drought and oil prices, and property costs have gone up due to interest rate rises. Increasing interest rates will not fix the drought. Increasing interest rates will only further put pressure on house affordability.

Consumers discretionary stocks are going to take a beating on the market in the next few weeks and may offer some value when this has taken place. Already today a number of consumer discretionary stocks are down.

Remember the time to b uy most shares is when everyone thinks they are doomed. This might be the case in some instances but clever analysis can usually find those companies that will withstand the downturn in cycle and will rebound for huge profits when the trading environment improves.

Good Luck

Pacific Brands to Reduce Product Numbers

Pacific Brands Ltd (ASX:PBG) plans to reduce the number of its products by up to 20%. Paul Moore (CEO) said that having over 140,000 lines was too complex. Moore told shareholders that sales and profits for the first four months of 2006-07 were better than for the same period in the previous year.

Pacific Brands will benefit significantly by reducing the product range. It will help cut stock levels and inventory costs. This has to be seen as a positive move by management to control costs in the business.

Pacific Brands Limited manufactures, imports, markets and wholesales a wide range of consumer goods primarily in Australia and New Zealand. The group has four operating divisions: Underwear and Hosiery, Outerwear and Sport, Home Comfort and Footwear.

Good Luck Investing

Flight Centre Mangement Buyout

Intelligent Investor has been recommending Flight Centre Ltd for some time and it looks to finally come to fruition.

Australian travel agency chain, Flight Centre, is considering a $A1.3
billion management buy-out. The privatisation has been proposed by the five founding shareholders, who control 57 per cent of the company, and is
backed by private equity firm, Pacific Equity Partners. Sales and profit
margins have suffered from changes in the industry, with a fall in profits
in 2005 but this is likely to reverse in the years ahead. Management can see that the company is grossy undervalued by the market.

This could be speculation to raise the price of the company but based on management I would say the deal is genuine as the asset does look underpriced based on future earnings potential.

Flight Centre (FLT) is Australias largest listed travel agent with operations throughout Australia and international operations in New Zealand, South Africa, Hong Kong, Canada, the United States and the United Kingdom. The company has over 1,000 retail outlets in the global network and over 200 businesses.

Good Luck Investing

Record Realty buys 22 US buildings

Record Realty Ltd (ASX:RRT) will have $A2.1bn of assets in its property trust after completing a deal to buy 22 US office buildings. The agreement to purchase the buildings across 13 US states from America's Government Properties Trust was announced on 24 October 2006. The FBI is among the tenants, which are all US Government agencies. The group expects to meet
its announced distribution of $A0.11 for 2005-06.

This has come just after major warnings from a US property guru that Austrlaian firms are overpaying for office buildings in the US. Is it a good move ? Well providing the company has not stretched itself to buy these properties I see no problem with acquisition. They are getting good
tenants across a number of areas of the country. These buildings should appreciate in the future and add value to the company.

RRT is priced reasonable with a very lowe PE ratio and PB ratio. At this stage I need to analyse the company further to see where its money comes from and where it goes to and how this deal will affect its cashflow and earnings.

Record Reality is a property fund with equity investments in buildings, with long-term leases to premium tenants, such as governments and blue chip companies. The Fund uses a leveraged investment approach where the funding arrangements for these investments will be provided by third-party investors. The responsible entity of the Fund is Records Funds Management
Ltd (RFM) a wholly owned subsidiary of Record Investments Ltd. Allco Management Limited, an independent financial services group that specialise in structured finance solutions, manages Record Investments.

Good Luck Investing

Tuesday, October 24, 2006

CBA Australias Largest Bank

Commonwealth Bank of Australia (ASX:CBA) is Australia's largest bank in terms of sharemarket capitalisation. The company has reaffirmed its forecast for growth in cash earnings per share in 2006-07. Shares in CBA increased $A0.64 to $A47.09 on 23 October 2006, giving it a market capitalisation of $A60.7bn, compared with $A60.6bn for National Australia Bank.

CBA has indicated that it recorded strong underlying credit growth in the first quarter of 2006-07, associated with the continued sound performance of the Australian economy.

You can always bet on banks to make money and to conitnue to make money. They have a moat around their customers as it is too hard to change bank accounts.

CBA is a great bank and should continue to trend higher in the longer term and most banks are at acceptacble PE, PEG and Divi yeilds.

I will try and right an article on the best bank based on fundamentals and growth prospects in the next few days.

Good Luck Investing

Woolworths Reports Good Growth Figures

Woolworths proudly reported strong sales in the first quarter of 2006-07. Turnover for the 14 weeks to 1 October 2006 rose by 21 per cent, in spite of generally weaker consumer discretionary spending. The strongest sales growth was in the food and liquor business, helped by acquisitions and higher food prices.

This trend will be steadied though if drought conditions continue to get worse. But one thing to note is people always need to eat and Woolworths will always have consumers.

The only weaker result was for the Big W discount department store chain and consumer electronics, where growth was less than that of the June quarter.

Woolworths is still overpriced at the current level but you do pay for quality. The PE, PEG and book values are substainally overpriced but looking at future growth the company would be a good price anywhere under $20.

Good Luck investing

Suncorp Metway not a takeover target

Suncorp-Metway has seen its share price fall after takeover speculation abated. The reason was the announcement on 23 October 2006 that a formal agreement had been entered into with its own merger target, insurer Promina Group. Under the terms of the deal, each of the two entities must keep the other informed of any other deal that arises, with three days' warning.

A break fee of $A35m would also be payable by Promina, while Suncorp will incur such a liability if the competition regulator vetoes the merger.

This is a major merger which will cause a bit of stirring in the financial
world. This will not be great for competition but it will be great for
shareholders of Promina and Suncorp-Metway. Promina has always been priced below its value and this merger has taken it to a much more reasonable level. At this stage Promina is overvalued. If you don't own it I would not recommend getting in on either Suncorp-Metway or Promina until the regulators have looked at the deal.

Yesterday, Promina stock closed at $A6.92 while Suncorp lost $A1.29 to finish at $A21.41.

Good Luck investing

Japan Shuns T3

It was announced that as part of the $A8bn float, a public offering without listing has been conducted in Japan for 120 million shares. This is falling short of the initial target of $A500m. Why would Japanese investors want to get in on a company that has a lot of risk longer term when they have suitable shares within their own exchange.

Seems like the government might have trouble hitting its targets as the majority of Mum and Dad investors are shunning this float. After already being burned by Telstra and the current public perception of Telstra it is amazing they are able to sell even half of the issue.

Good Luck Investing

Monday, October 23, 2006

Telstra T2 Take up high

The "T3" sale of the Australian Government's remaining stake in telco Telstra begins today for retail investors. you have until 9 November to get some shares. Some 50% of the $A8bn worth of stock to be issued has been pre-allocated to 45 broking firms and financial services companies who had received expressions of interest by sophisticated investors. Finance Minister Nick Minchin noted that 212,000 such clients have taken part, meaning that "T3" is well on track to becoming a successful issue.

Something to note was that this take up has been higher than T2.

All this will drive more small investors to get some of the telstra shares. This may push up the price short term but longer term Telstra is still a risky investment.

Good Luck Investing.

Speculation that National Austrlaia Bank To sell Credit Card division

There is speculation that the National Australia Bank (NAB) may be about to divest its credit card division. The business is worth approx $4 billion. Interest in acquiring it has been voiced by Citibank Australia, which has the Diners Club credit card brand in Australia. Combining its market share of 8%, as the number five, with that of NAB, the number four, would result in a combined 24%, larger than current leader Commonwealth Bank of Australia's 23% share.

This would add a significan't injection of cash into National Austrlaia Bank. What it would do with this cash is also up for speculation but it may return some of it to shareholders. This could cause a short term spike in the share.

But for investing this is going to take away a major part of the National. At the moment the national is one of the better priced banks as far as fundamentals but if it was to sell this asset it would significantly hurt its longer term prospects for growth.

I won't specualte further till more information is available ... as a lot would depend on the price.

Good Luck investing

Rupert Murdochs clever positioning in John Fairfax Holdings

News Corporation has denied any plans to take over Australian newspaper publisher, John Fairfax Holdings. The media company acquired a 7.5 per cent stake in Fairfax on 19 October 2006.

I have to say I don't think the current laws would allow News Corporation to take over Fairfax. Rupert Murdoch insisted that the interest was a strategic holding. This could prove to be a great play by Rupert Murdoch.

He did not rule out increasing the stake but denied any plans to swap assets or take over the company. He said that he had no present plans to invest in other media assets in Australia.

From here News Corporation will benefit significantly buy any rival trying to capture Fairfax. This will happen eventually and News Corporation has given itself a seat at the table for any talks which might occur regarding any take over offers.

Rupert Murdoch is a very good manager that understands controling an asset rather than owning it.

Good Luck Investing.

Saturday, October 21, 2006

Sample Portfolios

There are various ways to value a company. These include PE, PEG, PB, ROE and PS.

I am going to construct sample portfolios that cover some of these aspects for all stocks over 500 Million capitalisation. I chose this range as it leaves us a field of approx 300 shares on the Australian Stock Exchange.

Each Portfolio will contain 5 stocks that meet the criteria.

Portfolio 1 : Low Price to Earnings Ratio.
For this portfolio I took those 5 lowest PE stocks which had earnings above 0. The stocks selected and the Price is :

  • $1.12 - AUS Auselect Limited
  • $0.98 - MFT MFS Diversified Trust
  • $1.43 - RAB Rabinov Diversified Property Trust
  • $0.35 - GIR Giralia Resources NL
  • $1.05 - FPG Forest Place Group Limited

Portfolio 2 : High Price to Earnings Ratio.
For this portfolio I took those 5 Highest PE stocks which had earnings above 0. The stocks selected and the Price is :

  • $0.68 - BOC Bougainville Copper Limited
  • $0.82 - IRN Indophil Resources NL
  • $2.70 - BSG Bolnisi Gold NL
  • $0.36 - GOG Great Artesian Oil & Gas Limited
  • $0.67 - CNT Centamin Egypt Limited

Portfolio 3 : Low Price to Book Ratio.

For this portfolio I took those 5 lowest PB stocks which had earnings above 0 . The stocks selected and the Price is :

  • $0.58 - AMH AMCIL Limited
  • $1.32 - GMI Global Mining Investments Limited
  • $1.05 - FPG Forest Place Group Limited
  • $0.58 - WOTCA Westpac Office Trust
  • $1.20 - AVM Anvil Mining Limited

Portfolio 4 : High Price to Book Ratio.
For this portfolio I took those 5 Highest PB stocks which had earnings above 0 . The stocks selected and the Price is :

  • $0.38 - EPY E-pay Asia Limited
  • $78.97 - GOLD Gold Bullion Limited
  • $0.95 - IAU Intrepid Mines Limited
  • $21.65 - LEI Leighton Holdings Limited
  • $22.40 - NCM Newcrest Mining Limited
  • $1.78 - SRK Strike Resources Limited

Portfolio 5 : Low Price to Earnings Growth Ratio.

For this portfolio I took those 5 lowest PEG stocks which had earnings above 0. The stocks selected and the Price is :

  • $3.34 - OXR Oxiana Limited
  • $1.49 - AZA Anzon Australia Limited
  • $0.95 - IAU Intrepid Mines Limited
  • $3.03 - AWE Australian Worldwide Exploration Ltd
  • $0.19 - SMO SMC Gold Limited

Portfolio 6 : High Price to Earnings Growth Ratio.
For this portfolio I took those 5 highest PEG stocks which had earnings above 0. The stocks selected and the Price is :

  • $0.82 - IRN Indophil Resources NL
  • $5.05 - FXJ John Fairfax Holdings Limited
  • $13.51 - ZFX Zinifex Limited
  • $4.30 - MFS MFS Limited
  • $8.80 - FMG Fortescue Metals Group Ltd

I will keep an eye on these portfolios and do some analysis after a fe months ... I believe the lower PE, lower PB and Lower PEG should be the better performing stocks. I actually think the low PEG should be the best sample portfolio.

Lets see how it goes ...

Good luck investing.

Friday, October 20, 2006

Qantas to provide a nice profit

Qantas has advised that it is on track to deliver a higher net profit in

Australia's national carrier is benefiting from a large fall in the crude
oil price, which has cut its fuel bill. Contrary to this though the
airline's restructuring costs are likely to rise due to plans to outsource
IT systems maintenance activities to two companies in India.
This will result in the loss of 340 jobs, on top of the 1,000 redundancies
that have previously been announced.

Looking at their actions you can see that they are trying to reduce costs
and are focused on the bottom line. More interestingly, their recent Oil
tax which was levied on tickets shows they have pricing power. This could
be allow them to re-raise the oil levy if it needs it when oil prices rise

Qantas is an interesting company that has been undervalued for a while. I
regret not getting into this earlier a it shows great value.
I wouldn't buy Qantas at this price but look at it if it falls back into
the 3.50 - 3.70 range.

Good Luck Investing

Woodside Slides

Shares in Woodside Petroleum fell on 19 October 2006 after it released its
September-quarter production report. The Australian oil and gas producer
indicated that it might not be able to meet its production target of 72
million barrels of oil equivalent this year.

While this may seem worrying it might actually be a blessing in disguise.
The price of oil has dropped and producing less oil this year might be a
benefit for later years. Only time will tell, it all depends on the
underlying reasons for not making the target.

If this continues to slide a few more dollars it could be a good price.

Good Luck investing

Santos getting stuck in the mud

As mud continues to flow from the Banjar Panji gas well in East Java the
clean-up bill has risen to $US180m. The figure means Australian-listed
Santos, an 18-per-cent partner, has an exposure of $A43.7m. Santos says it
has insurance cover for such events, but insurance investigations are still
continuing. The project's 50-per-cent partner, Lapindo Brantas, has already
announced it will be receiving $US27.5m from its insurance policy. Since
May 2006 the well has been spewing up to 150,000 cubic metres of "rotten
egg" gas each day. Santos shares remained steady but will they continue to
remain steady ?

This is one business it is probably best to be out of for the moment.

My recommendation would be to SELL and look for safer deals elsewhere.

Good Luck investing.

Coles drops as takeover fails

The Sydney Morning Herald released some more facts on the Coles takeover.

Below is an extract

The private equity consortium that wanted to take over Australian retail
group Coles Myer has abandoned the plan. Led by US-based Kohlberg Kravis
Roberts, it had bid up to $A15.25 per share, but was rebuffed by the Coles
board. News of the final rejection triggered selling by hedge funds of
Coles stock, which closed $A1.30 lower at $A13.20 on 19 October 2006.
Analysts are unsure as to whether other private equity groups will now
pursue a Coles buy-out or not. Any hostile bid would be very hard to pull
off. Coles chair Rick Allert had again stressed the conditionality of the
KKR offer and said it significantly undervalued the company

Good Luck investing

Thursday, October 19, 2006

Coles Rejects Bid

Coles have released an announcement that the KKR consortium had approached
Coles Myer after the close of trading with a revised bid of $15.25.
The board considered and rejected on the grounds that the bid was subject
to due diligence and other conditions, and that shareholders would be best
served if the company pursued its own growth strategy.

Personally I think they were acting in their own interests ....

The company said that KKR had indicated that this was its final bid and
that KKR would withdraw its bid if it did not gain Coles Myer board
approval by 23rd October.

Coles has dropped significantly since this news was released. It was down
$1.33 just before close of trading today.

Good Luck Investing.

Tuesday, October 17, 2006

ITL Ltd (ASX:ITD) confirmed a maiden dividend of 1 cent fully franked on the back of its 2006 results of $31.3M revenue and $3.3M net profit. It also forecast an increase in revenue of 15 per cent to $36M for the 2007 financial year. First quarter results of $9.9M indicate that ITL is well on track to achieve its forecast.

Based on this announcement I thought an analysis of the company would be a good idea.

Company Profile
ITL (ITD) operates in development, manufacturing and commercialisation of medical products. ITL is focused on innovative medical devices for the application of blood collection and related markets. ITL has contracts with distributors such as Baxter Healthcare (US, Europe and Australia), Terumo (US, Japan, India and China), Fresenius (Europe), Japan Medical Supplies (North America and Asia) and the American Red Cross.

Fundamentally they are still overpriced at the current level after jumping 7% to 38.5c.

Looking at Book value (25c) EPS 3.2c, Divi yeild (2.5%) and Return on equity the company is overpriced by a fair bit. This is definitely a companyto watch and those interested may want to take a risk on it.

I'll be waiting to see the stock come down to a bargain price. Based on future forcasts the stock seems fair value at approx 33c. Based on the new information from the AGM you would want to pick this stock up around the 30c mark. This would be a good 10% discount for a company which looks to be heading in the right direction.

Good Luck.

Friday, October 13, 2006

Value investing Techniques

Below is a list of what you should look at a company when analysing the stock:

  • Does the company sell products that are likely to endure ?
  • Is the business of the company easy to understand ?
  • Does the company invest in and operate businesses within its area of expertise?
  • Does the company have the ability to maintain or increase profitability ?
  • Does the company have control on its debt. ie Is it overexposed to debt ?
  • Does the company show consistently high return on equity and capital?
  • Have the earnings per share (EPS) and sales per share of the company shown consistent growth ?
  • Is the EPS growth above Market Averages ?
  • Has the company been buying back stock to increase shareholder value when the price is low ?
  • Has management wisely used retained earnigns to increase the rate of return (ROR) to shareholders?
  • Looking at the chart is the Share rising ?
  • Is the share Priced realistically based on PE, PEG and Dividend Yeilds?

If the company gets a tick in every column you might be onto agood share ...

Good Luck investing...

Tuesday, October 10, 2006

Telstra Limited - T3 Offer

Sorry for not posting for the last week but I have been eagerly awaiting the Telstra 3 sale and the details surrounding it.

In my simple opinion the offer is not worth taking. I have a few reasons:

1. The business will still be controlled by the government. Sure they won't have any shares but I think you will find the ACCC and the government will legislate heavily agsint Telstra in the future.

2. The business outlook is not good. They have ever increasing competitors coming into their market and they are running on outdated technologies.

3. They control the majority of market and this can only be taken away from them. Many people have a poor view of Telstras service and are rapidly leaving for new phone companies, new broadband companies, etc. Telstra might try to get into new markets but it may cost them a lot of cash to entice some customers back.

4. The offer has so many enticements it is like a shopping advertisement. I was surprised the kitchen knoves were not part of the package. If a company has to try this hard to sell shares and they can't use the fundamentals of the company then it is a clear warning to steer clear.

you will read lots about the telstra offer and analysts saying its a good or bad thing ... Just step back and think about it for a moment ... is the stock going to grow in the future ... and how is it going to do that ... If you can't make a case for it then don't worry investing no matter how cheap it is priced or how many incentives you are thrown.

Good Luck.

Thursday, October 05, 2006

AAQ - Australis Aquiculture Ltd

Crazy Jim Smith ( www.crazyjimsmith.com ) has requested I take a look at ASX:AAQ.

For those that don't know Australis Aquaculture Limited (AAQ) is involved in the production and marketing of barramundi. Fingerlings are sourced from Australia and transported to a US production facility for sale in the US market. Australis has acquired an aquaculture facility at turners Fall, Massachusetts USA and since September 2004 has exported commercial quantities of Barramundi fingerlings to its US aquaculture grow out facility.

The numbers are : Total revenue increased 238% to $5.6 million while net loss decreased 82% from a loss of ($1,776,198) for FY 2005 to a loss of just ($322,892) for FY 2006. Third-Party sales grew by 672% from $412,511 in FY 2005 to $3,186,361 for FY 2006.

While they have reduced the loss they are still making a loss and promises aren't always kept but it does look promising at this stage.

Something to note is the new hatchery in North America will help costs as stated in the preliminary report.

"Over time, the Company’s US hatchery will reduce operating costs while helping to assure a reliable fingerling supply. The new hatchery will be expanded from its current pilot phase to an
estimated 7 million fingerlings per year in order to support the company’s medium term production target of 5,000 tpa."

This should help drive down costs and bring the company into profit.

Looking at the cashflow sheet we can see they are still spending more then they are bringing in which is never a good side. Cash reserves more than halved during the year and this will either need to be recouped by increasing sales this year or spending will need to be cut.

Overall this is not a stock I would recommend. If you are looking for a buy price you probably want to get in around 5-8 times earnings. If we assume the company will make a profit nexct year earnings should increase to approx 1.5c - 2c in optimum conditions. More likely they will earn 0.5c-1c next year. This puts the valuation on this company around 5-8c. If they hit 2c earnings next year the company would be valued around 16-20c. This is still a long drop from where it currently is sitting at 46c.

but Remember this is a speculator stock and it could increase dramtically in the near future if everything goes well for them but there are a lot of risks associated with it. If you really want this share I would say wait another 6 months and see if it has fallen back down. It spiked in early 05 just to come back to its previous level. This time I suspect it will do the same and be back around 36c .. still too high for me though.

Good Luck

Tuesday, October 03, 2006

ColorPak Ltd - Buying Opportunity

Just been doing some research into finding a few more stocks to consider. It is so hard finding good stocks in the currently overpriced market.

One which did stand up and was noticed was Colorpak Ltd ( ASX:CKL)

Do not worry about the downturn in earnings this year as this was due to one off costs. If you look at the sales growth over a number of years it is phenominal.

The graph is in a slight downtrend but seems to be steadying at the current price.

All of the ratios are looking good, PE, PB, PEG, Divi yeild. The only one of slight concern is debt to equity which is sitting at 66%.

The payout ratio is small which means dividends could be increased in the future. The earnings have doubled while the share price has remained static. There are so many reasons why this share should be valued higher than where it is ... but with a debt to equity of 66% we need to be careful. This is a speculation stock and for that reason we want a very good price.

Initially we would need a 20% discount to full value and I price full value somewhere around 85c-90c. The current share price is 51c giving us a discount of 40% to the full value. With a good dividend yeild holding this stock at this level we should see it climb in the next few years.

This is a speculative stock due to the high Debt level and I am going to be putting in a small amount of my funds. Lets see if it can grow rapidly like IBA did for us a few weeks ago.

Good luck.